September 21, 2009

Bottom Line

We’ve heard Glenn Beck’s rants on Fox and read Sarah Palin’s posts on Facebook. We’ve watched LaRouche supporters disrupt town hall meetings and seen teabaggers descend upon Washington. We’ve talked about immigrants, abortion, and death panels--and listened to a woman named Betsy McCaughey explain why reform will mean pulling the plug on grandma.

But, at the end of the day, the central challenge in crafting health care reform remains exactly what it’s always been: Coming up with the money to pay for it. And this week, just maybe, we’ll learn whether the Democrats and their allies can do it.

This week is crucial because the Senate Finance Committee will be debating how to write reform legislation. Finance is one of five committees with a say over health care. The other four--three in the House, one in the Senate--have already passed their bills. But most observers consider Finance the most crucial committee politically. Thanks partly to the filibuster, the Senate is where reform bills will have the harder time passing. And unlike the Health, Education, Labor, and Pensions Committee--the other Senate panel with a piece of reform legislation--Finance has actual jurisdiction over methods of raising money.

That helps explain why Finance has taken so long. Health care reform is about making sure everybody has health insurance--and that the health insurance everybody has actually insures. Financially speaking, that requires the government to make two very large commitments. It must expand Medicaid, the federal-state program for the poor, so that it covers everybody under a certain income threshold (133 percent of the poverty line) and not just narrow categories like single women with children. And it must provide subsidies to higher-income people who struggle to pay the price of insurance.

It’s that second part, really, where the things get dicey--because those subsidies aren’t cheap for the government to finance. We just learned this week that the average health insurance policy for a family of four will cost more than $13,000 annually this year. For a family making $35,000 or even $55,000 that’s an awful lot of money--particularly if the family is still expected to shoulder large out-of-pocket costs in the forms of deductibles, co-payments, and non-covered services. That’s why the reform plans that President Obama and his allies originally proposed offered financial assistance to people making up to four times the poverty line--$88,000 a year for a family of four, with the subsidies phasing out with income. (A family making $85,000 would get almost nothing; a family making $35,000 would get a ton of help.) One reason to offer so much money was that these original plans set a reasonably high standard: Insurance plans couldn’t leave people saddled with huge out-of-pocket costs.

But providing such comprehensive coverage makes the insurance itself a bit more expensive, at least for the first 10 years before other system reforms kick in (ideally, generating enough savings to offset the cost of the subsidies). The best estimates are that, at a very bare minimum, it takes close to $1 trillion over 10 years. And while a lot of that money can come from savings in other programs, there has to be some new revenue, as well. Congress, in other words, has to pass some kind of tax.

The trouble for the Finance committee--and, really, the Senate as a whole--is that there’s no consensus on how to do this. The House reform bills all proposed to get the necessary revenue by taxing the rich, a strategy President Obama himself once endorsed, albeit in slightly different form. But neither a majority on the Finance Committee nor anything resembling a majority of senators seem willing to do that, undoubtedly because--again--the membership of both is more conservative. So Max Baucus, chairman of the Finance committee, is pushing a different strategy, one first proposed by Finance member John Kerry: Taxing high-benefit insurance plans, albeit indirectly by taxing the insurers who provide them rather than the people who have them.

There is, in fact, a lot to recommend this approach on paper. Economists are virtually unanimous that the existing tax break for health insurance is both unjust and unwise--unjust because it gives a bigger break to wealthier people, unwise because it dampens incentives to shop for cheaper insurance. It’s also a huge pot of money. The tax break--which is, technically, an exclusion from income taxes--is worth more than $200 billion a year, enough to pay for health reform with enough money left over to buy a new fleet of aircraft carriers. Even a partial rollback, one that affected people with unusually generous coverage, would generate a ton of revenue.

Still, even that partial rollback would make some people unhappy--and not just wealthy people. Lots of union members have expensive plans, partly because they’ve won them in negotiations and partly because their demographic profile results in higher costs within their insurance groups--that is, they are older, or work in physically hazardous jobs. These workers have pretty good representatives on the Finance committee: West Virginia’s coal miners have Jay Rockefeller and Michigan’s auto workers have Debbie Stabenow, just to name two. There’s also the fact that some parts of the country happen to have unusually high medical costs, which means insurance for even middle-class people are expensive by national standards. Among them are Maine, New York, and New Jersey, all of which are also represented on Finance--by Olympia Snowe, Charles Schumer, and Robert Menendez.

Rockefeller, for one, has made public his desire to scrap changes to the tax on insurance policies--and instead adopt an approach more like what the House has. But even if there were political support for such an approach, switching would raise another problem. The presence of the insurance tax reform is the reason that the Congressional Budget Office (CBO) determined that Baucus’ bill, unlike the House counterpart, would not only pay for itself completely in 10 years but also reduce spending over the long term. Switching over completely to a tax on the wealthy, then, would require strengthening the House’s proposal even more--in ways that would likely make it even more difficult to adopt politically.

There’s a way out of this dilemma. Since the Kerry proposal taxes insurers rather than individuals, it would be relatively straightforward to dictate that groups facing high costs because of age, unusually large regional variations, or physical risk don’t see their prices go up by that much (or at all). And while carving out some exceptions to the insurance tax change would mean reducing the revenue from the tax, that money could be made up by making the tax itself larger--or adding some other revenue source, whether it’s a smaller version of the House income tax or maybe even a small tax on sugary sodas.

Can the Democrats--and their lone potential supporter among Republicans, Snowe of Maine--get behind such a compromise? They’d better, in no small part because the Baucus proposal needs more money than Baucus himself has put on the table. His proposal has lower subsidies and offers less insurance protection than the House bills or the HELP bill. Before voting the bill out of committee and onto the Senate floor, Finance really needs to make it stronger--which means coming up with more money, not less. If they can’t do that, they’re going to be stuck with a bill that reaches not enough people--and gives the people it does reach not enough protection. As always, it’s all about the money.

Jonathan Cohn is a senior editor of The New Republic. This column is a collaboration between TNR and Kaiser Health News. KHN is an editorially independent news service and is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization, which is not affiliated with Kaiser Permanente.